VIX puts stocks on correction alert

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I alerted readers to the possibility of a pullback/correction on stock markets in two posts on Thursday and Friday: “I’m hedging my stocks by going long volatility” and “Stock markets: two canaries calling for caution“. My sentiments were echoed by Richard Rhodes (via the StockCharts.com blog), the editor of the daily trading reports, The Rhodes Report.

Rhodes said: “The recent rally in the broader stock market has begun to correct; and it shall likely correct for the next several weeks. We view this decline much in the same manner as the January 2010 to early February 2010 decline, during which the S&P 500 Index lost roughly 106 points or nearly -10%.

“Certainly our momentum models are turning lower, and now we view the VIX as a confirming indicator that perhaps has higher [VIX] prices in mind than anyone is prepared for at this juncture. But at this point, we view any decline in stocks as transitory prior to perhaps a larger high in the 2nd quarter.”

Source: StockCharts.com, January 22, 2011.

Rhodes continued: “To wit, the weekly chart above shows major support at the 16 to 18 zone is holding once again, and has for all practical matters since mid-2007. … one could very easily note once the VIX turns higher, then it generally “spikes” higher. If that is the case here, and the probabilities do favor such an outcome, then minor trendline resistance at 19 should be taken out. This would argue for a 200-week exponential moving average mean reversion exercise that would carry prices upwards to 24.56 or even slightly higher. At that point, quite obviously the technical landscape would need to be reassessed, for further [VIX] gains would put the declining trendline of the 2008 to 2010 highs into play. We fear what a breakout above this level would mean to stocks and the US economy in general.”

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More on this topic (What's this?)
EURO STOXX 50 VIX At Record Wide Spread Versus S&P 500 VIX
Read more on Volatility Index (VIX) at Wikinvest
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